The Investment Column Radical surgery revives McAlpine

McAlpine had warned in January that its decision to pull out of traditional open tender building work would send it plunging into the red. It was no surprise yesterday, therefore, that when it announced the figures the shares should edge 4p higher to 178p.

There was relief that the company, no stranger to banana skins, should have delivered as promised and investors have started to study the potential benefits of the focus on housebuilding, civil engineering and partnership work.

Results for the year to December confirmed the need for something radical to be done to allow McAlpine to create value for shareholders once again rather than eating it up, which as the chart shows, has been its main achievement over the past five years.

The pre-tax loss of pounds 23.5m was struck after a pounds 34.7m exceptional write- off to cover losses from the discontinued building businesses of pounds 7.3m and the pounds 27.4m cost of shutting them down with the loss of 650 jobs. Despite the collapse at the earnings per share line, the dividend was maintained at 7p as a sign of confidence that the corner has finally been turned.

Certainly there is evidence that the housing market is beginning to pick up after a dismal second half to last year snuffed out the green shoots that most builders experienced in the first three months of 1995. An improvement is badly needed as last year's rise in average selling price was not enough to offset rising costs elsewhere and operating profits slipped from pounds 17.9m in the 14 months to December 1994 to just pounds 11.5m, a 2.6 percentage points drop in the margin to 7 per cent.

Civil engineering also had a tough time of it as the Government cut back on its road spending plans and the company took the sensible view that a lot of the work it had previously tendered for was not worth the candle. A collapse in the order book to a profitable rump of prospective work should mean that results start to improve.

Elsewhere, the formation of a special projects division to chase work such as football stadia and other leisure opportunities where McAlpine has a competitive advantage makes good sense. Profits from America of pounds 3.4m may not sound a big return on sales of pounds 102m, but it is twice as much as last year and the order book is improving.

McAlpine is far from out of the woods yet but, almost alone in the industry, it has taken some courageous decisions in the past few months, despite consistent sniping from its own shareholders. Pre-tax profits of maybe pounds 12.5m this year and pounds 15m next time put the shares on a prosective p/e ratio of 16 falling to 13. Given the balance between recovery potential and the uncertainty still hanging over the industry that is reasonable.